Arbitration

Arbitration is a formal method of dispute resolution involving a neutral third party who makes a binding decision. The third party neutral (the 'arbitrators', 'arbiters' or 'arbitral tribunal') renders the decision in the form of an 'arbitration award'. An arbitration decision or award is legally binding on both sides and enforceable in the courts, unless all parties stipulate that the arbitration process and decision are non-binding.^[1]

Not to be confused with Arbitrage.

Arbitration is often used for the resolution of commercial disputes, particularly in the context of international commercial transactions. In certain countries such as the United States, arbitration is also frequently employed in consumer and employment matters, where arbitration may be mandated by the terms of employment or commercial contracts and may include a waiver of the right to bring a class action claim. Mandatory consumer and employment arbitration should be distinguished from consensual arbitration, particularly commercial arbitration.

There are limited rights of review and appeal of arbitration awards. Arbitration is not the same as: judicial proceedings (although in some jurisdictions, court proceedings are sometimes referred as arbitrations^[2]), alternative dispute resolution,^[3] expert determination, or mediation (a form of settlement negotiation facilitated by a neutral third party).

Most importantly, the parties’ ability to choose what substantive and procedural law governs the arbitration. This is often called the principle of ‘party autonomy’.

[5]

In contrast to litigation, where one cannot "choose the judge", arbitration allows the parties to choose their own tribunal. This is especially useful when the subject matter of the dispute is highly technical: arbitrators with an appropriate degree of expertise (for example, quantity surveying expertise, in the case of a construction dispute, or expertise in commercial property law, in the case of a real estate dispute^[7]) can be chosen.

[6]

Arbitration is supposed to be faster than litigation.

[6]

Arbitral proceedings (other than investor-state arbitration) and arbitral award can be made confidential.

[8]

In arbitral proceedings the language of arbitration may be chosen, whereas in judicial proceedings the official language of the country of the competent court will be automatically applied.

Because of the provisions of the , arbitration awards are generally easier to enforce in other nations than court verdicts.^[5]

New York Convention 1958

In most legal systems there are very limited avenues for appeal of an arbitral award, which is sometimes an advantage because it limits the duration of the dispute and any associated liability.

[5]

Parties often seek to resolve disputes through arbitration because of a number of perceived potential advantages over judicial proceedings. Companies often require arbitration with their customers, but prefer the advantages of courts in disputes with competitor.^[4] Prevalent advantages of arbitration over litigation involve:

Some of the disadvantages include:

Procedures which necessarily lead to a determination which the parties to the dispute may not enter into an agreement upon:^[12] Some court procedures lead to judgments which bind all members of the general public, or public authorities in their capacity as such, or third parties, or which are being conducted in the public interest. For example, until the 1980s, antitrust matters were not arbitrable in the United States.^[13] Matters relating to crimes, status and family law are generally not considered to be arbitrable, as the power of the parties to enter into an agreement upon these matters is at least restricted. However, most other disputes that involve private rights between two parties can be resolved using arbitration. In some disputes, parts of claims may be arbitrable and other parts not. For example, in a dispute over patent infringement, a determination of whether a patent has been infringed could be adjudicated upon by an arbitration tribunal, but the validity of a patent could not: As patents are subject to a system of public registration, an arbitral panel would have no power to order the relevant body to rectify any patent registration based upon its determination.

[11]

Some legal orders exclude or restrict the possibility of arbitration for reasons of the protection of weaker members of the public, e.g. consumers. Examples: German law excludes disputes over the rental of living space from any form of arbitration, while arbitration agreements with consumers are only considered valid if they are signed by either party,^[15] and if the signed document does not bear any other content than the arbitration agreement.^[16]

[14]

By their nature, the subject matter of some disputes is not capable of arbitration. In general, two groups of legal procedures cannot be subjected to arbitration:

Agreements which provide that, if a dispute should arise, it will be resolved by arbitration. These will generally be normal , but they contain an arbitration clause

contracts

Agreements which are signed after a dispute has arisen, agreeing that the dispute should be resolved by arbitration (sometimes called a "submission agreement")

Arbitration agreements are generally divided into two types:

The former is the far more prevalent type of arbitration agreement. Sometimes, legal significance attaches to the type of arbitration agreement. For example, in certain Commonwealth countries (not including England and Wales), it is possible to provide that each party should bear their own costs in a conventional arbitration clause, but not in a submission agreement.

In keeping with the informality of the arbitration process, the law is generally keen to uphold the validity of arbitration clauses even when they lack the normal formal language associated with legal contracts. Clauses which have been upheld include:

The courts have also upheld clauses which specify resolution of disputes other than in accordance with a specific legal system. These include provision indicating:

Agreements to refer disputes to arbitration are generally presumed to be separable from the rest of the contract. This means that an issue of validity pertaining to the contract as a whole will not automatically vitiate the validity of the agreement to arbitrate.^[5] For example, in disputes on a contract, a common defence is to plead the contract is void and thus any claim based upon it fails. It follows that if a party successfully claims that a contract is void, then each clause contained within the contract, including the arbitration clause, would be void. However, in most countries, the courts have accepted that:

This protects the tribunal's ability to arbitrate beyond termination of the contract.^[5] Arguably, it is necessary to ensure that disputes are arbitrated rather than litigated -- without such clause, a dispute arising out of a contract will necessarily be litigated.

Arguably, either position is potentially unfair; if a person is made to sign a contract under duress, and the contract contains an arbitration clause highly favourable to the other party, the dispute may still referred to that arbitration tribunal. Conversely a court may be persuaded that the arbitration agreement itself is void having been signed under duress. However, most courts will be reluctant to interfere with the general rule which does allow for commercial expediency; any other solution (where one first had to go to court to decide whether one had to go to arbitration) would be self-defeating.

The Geneva Protocol of 1923

The Geneva Convention of 1927

Geneva Convention on the Execution of Foreign Arbitral Awards, 1927.

The European Convention of 1961

The Washington Convention of 1965 (governing settlement of international investment disputes)

The (ICSID) of 1966 for investment arbitration

Washington Convention

The of 1985, (revised in 2006).^[42]

UNCITRAL Model Law on International Commercial Arbitration

The (providing a set of rules for an ad hoc arbitration)

UNCITRAL Arbitration Rules

to act fairly and impartially between the parties, and to allow each party a reasonable opportunity to put their case and to deal with the case of their opponent (sometimes shortened to: complying with the rules of ""); and

natural justice

to adopt procedures suitable to the circumstances of the particular case, so as to provide a fair means for resolution of the dispute.

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Judicial Arbitration is, usually, not arbitration at all, but merely a court process which refers to itself as arbitration, such as small claims arbitration before the in the United Kingdom.^[2]

County Courts

Online Arbitration is a form of arbitration that occurs exclusively online. There is currently an assumption that online arbitration is admissible under the New York Convention and the E-Commerce Directive, but this has not been legally verified. Since arbitration is based on a contractual agreement between the parties, an online process without a regulatory framework may generate a significant number of challenges from consumers and other weaker parties if due process cannot be assured.

[57]

High-Low Arbitration, or Bracketed Arbitration, is an arbitration wherein the parties to the dispute agree in advance the limits within which the arbitral tribunal must render its award. It is only generally useful where liability is not in dispute, and the only issue between the parties is the amount of compensation. If the award is lower than the agreed minimum, then the defendant only need to pay the lower limit; if the award is higher than the agreed maximum, the claimant will receive the upper limit. If the award falls within the agreed range, then the parties are bound by the actual award amount. Practice varies as to whether the figures may or may not be revealed to the tribunal, or whether the tribunal is even advised of the parties' agreement.

Binding Arbitration is a form of arbitration where the decision by the arbitrator is legally binding and enforceable, similar to a court order.

is a process which is conducted as if it were a conventional arbitration, except that the award issued by the tribunal is not binding on the parties, and they retain their rights to bring a claim before the courts or other arbitration tribunal; the award is in the form of an independent assessment of the merits of the case, designated to facilitate an out-of-court settlement. State law may automatically make a non-binding arbitration binding, if, for example, the non-binding arbitration is court-ordered, and no party requests a trial de novo (as if the arbitration had not been held).^[58]

Non-Binding Arbitration

refers to a determination in industrial disputes where an arbitrator has to resolve a claim between a trade union and management by making a determination of which of the two sides has the more reasonable position. The arbitrator must choose only between the two options, and cannot split the difference or select an alternative position. It was initiated in Chile in 1979. This form of arbitration has been increasingly seen in resolving international tax disputes, especially in the context of deciding on the Transfer Pricing margins. This form of arbitration is also known (particularly in the United States) as Baseball Arbitration. It takes its name from a practice which arose in relation to salary arbitration in Major League Baseball.

Pendulum Arbitration

Night Baseball Arbitration is a variation of baseball arbitration where the figures are not revealed to the arbitration tribunal. The arbitrator will determinate the quantum of the claim in the usual way, and the parties agree to accept and be bound by the figure which is closest to the tribunal's award.

As methods of dispute resolution, arbitration procedure can be varied to suit the needs of the parties. Certain specific "types" of arbitration procedure have developed, particularly in North America.

Such forms of "Last Offer Arbitration" can also be combined with mediation to create MEDALOA hybrid processes (Mediation followed by Last Offer Arbitration).^[59]

History[edit]

England[edit]

Arbitration in its common law form developed in England; in the Middle Ages, tribunals such as the Courts of the Boroughs, of the Fair and of the Staple arose as the Royal Courts were not designed for trade disputes, and trade with foreigners was otherwise unenforceable.^[60] In the mid-16th century, common law courts developed contract law and the Admiralty court became accessible for disputes with foreign merchants, broadening the venues for trade disputes.^[60] Courts became suspicious of arbitration; for example, in Kill v. Hollister (1746), an English court ruled that the arbitration agreement could 'oust' courts of law and equity of jurisdiction.^[61] Merchants, however, retained provisions to settle disputes among themselves, but tension between the arbitration proceedings and courts eventually resulted in the Common Law Procedure Act 1854 which provided for the appointment of arbitrators and umpires, allowed courts to 'stay proceedings' when a disputant filed a suit despite an agreement to arbitrate, and provided a process for arbitrators to submit questions to a court.^[60] Later, the Arbitration Act 1889 was passed, followed by other Arbitration Acts in 1950, 1975, 1979 and 1996. Arbitration Act 1979 in particular limited judicial review for arbitration awards.^[60]

United States[edit]

Arbitration was common in the early United States, with George Washington serving as an arbiter on an occasion.^[60] The United States had a notable difference from England, however, in that unlike England, its courts generally did not enforce executory agreements (binding predispute agreements) to arbitrate.^[62] This meant that prior to an award, a claimant could sue in court even if they had contractually agreed to settle disputes by arbitration. After the award, courts reviewed the judgment, but generally deferred to the arbitration,^[62] although the practice was not consistent.^[61]

The lack of enforcement of predispute agreements led to the Federal Arbitration Act of 1925,^[61]^[62] with New York leading with a state law enforcing predispute agreements.^[60] In 1921, the American Bar Association drafted the Federal Arbitration Act based on the New York law, which was passed in 1925 with minor changes.^[60] In the next decade, the American Arbitration Association promoted rules and facilitated arbitrations through appointments.^[60]

In the 21st century, arbitration has been frequently given negative media coverage, especially during and after the Me Too movement and the US Supreme Court case Epic Systems Corp. v. Lewis.^[63]^[64] In response, Democratic U.S. Representative Hank Johnson introduced the Forced Arbitration Injustice Repeal Act (FAIR Act) into the 116th United States Congress, which was cosponsored by Republican Representative Matt Gaetz and 220 other Democrats. The FAIR Act passed the House in the 116th Congress but did not pass the Senate;^[65] Both Johnson and Democratic Senator Richard Blumenthal reintroduced the act in the 117th United States Congress.^[66]^[67] In addition, Americans have also increasingly participated in "mass arbitration", a practice where consumers facing similar issues normally barred from participating in a class action lawsuit file multiple arbitration demands at once in an attempt to overwhelm a company's legal team. This has resulted in Amazon removing arbitration provisions from its terms of service,^[68] and mass arbitration has additionally hit Chipotle Mexican Grill, Uber, Lyft, Intuit, Facebook, and JPMorgan Chase.^[69]^[70]

Issues[edit]

Recently, controversies surrounding some high-profile international disputes have led to calls for a review of arbitration practices, especially in Europe. Observers have often criticized the role of third party litigation funding firms that are increasingly investing in lawsuits and arbitration proceedings in "hope of collecting a hefty share of the winnings."^[71]

Axel Voss, a German MEP and member of the EU Parliament’s Legal Affairs Committee, issued a report in July 2022 explaining the increasing influence of third party funding in arbitration as well as other legal proceedings.^[72] The report said it could be described as a "commercial practice can be best understood as a business model whereby an investor pays for the litigation costs on behalf of a claimant or a representative of a group of claimants, in exchange for an agreed fee in the event that the legal proceeding is successful. The fee is usually a percentage of the award made or the settlement secured in favour of the funded claimant party. Litigation funders themselves are not a party to the legal proceeding and have only an economic interest, not a legal interest in it."^[72]

In a follow-up article Voss wrote that Europe "must not allow millions of European consumers and Europe's justice systems to become pawns in profit seeking".^[71]

"Litigation funders identify cases with potentially large returns and typically pay the legal fees and other costs for the claimant, in return for a percentage of any award or judgement. Third Party Litigation Funding is largely unregulated in Europe, and most agreements are made in secret - rendering them ripe for abuse. Judges and defendants are often unaware that a claim involves a funder, what fees have been agreed, and what influence or conflicts of interest they may be," Voss claimed.^[71]

"Litigation funders say they offer access to justice for people who could not otherwise afford to bring cases. Yet if we listen to how funders describe themselves to their investors, providing ‘access to justice’ is clearly not their goal. They pick and choose cases in order to achieve the best return on their investments. They mainly choose large-value lawsuits, while typically considering ordinary cases involving lower-value claims as too risky or not profitable enough," he added.^[71]

The report gained special traction given its release came amidst an international battle over the region of Sabah in Malaysia and the biggest arbitration award in history announced against the Malaysian government. The case involved the self-proclaimed descendants of the last Sultan of the Sulu Sultanate , Malaysia, and an ambiguous colonial-era agreement signed by then Sulu emperor for commercial use of land in North Borneo in exchange for an annual payment of $5000. The region now falls within present-day Malaysia. The Malaysian government continued honoring the agreement until 2013 and stopped payment henceforth, leading to the arbitration case.

After Malaysia stopped the payment, one of the alleged heirs of the Sultan of Sulu filed a lawsuit for commercial arbitration at the Madrid High Court in Spain, which appointed Gonzalo Stampa the sole commercial arbitrator on the matter.^[73] On February 28, 2022, Stampa ruled in favor of the alleged descendants of sultan and ordered Malaysia to pay $14.92 billion in settlement to the litigants.^[74] The award was eventually struck down by the Hague Court of Appeal on June 27, 2023.^[75]

Mary Honeyball, former MEP and former member of the European Parliament’s Legal Affairs Committee, said no case "highlights the need for stronger EU regulation of litigation funding than the $15 billion arbitration award against the Government of Malaysia in the Sulu case".^[76]